Rafi Mohammed

Want to Start a New Airline? Lower Your Price...to as Low as $10 a Flight

Posted on May 1st, 2007 (0 Comments)

Last week, I got a phone call or email from practically every person I know raving about the fare structure of Skybus, a new discount airline. Skybus offers ridiculously low fares, but charges you for just about everything else. While seating is not assigned (it’s line up and hope for a good seat), $10 lets you onboard before the masses (who didn’t pay the extra $10) duke it out for aisle seats. Want to check your bags? That’ll be $5. A soda…$2. Want to go to the bathroom…that’s still free.

But where Skybus is really raising eyebrows is its pricing strategy of offering $10 fares on its routes. And get this, these $10 fares are not limited time offers or restricted to 5:30 AM flights. Skybus pledges to offer at least 10 seats on EVERY flight for $10. And these aren’t phantom seats, I checked out their web site and there are plenty of $10 seats available. This $10 pricing strategy is smart for many reasons. First off, it’s $10 – what a great marketing splash! But just as importantly, this strategy creates loyalty to Skybus’ web site. Sure there’s a good chance that the $10 seats will be sold out, but it definitely makes sense for a traveler to at least check availability when booking a trip to see if luck is on their side. And if that $10 fare is not available, they may just stick around to book a $79 fare.

I find it interesting that even if a startup airline offers an arguably better product, it still has to discount its price. Case in point: EOS Airlines. EOS offers a luxury ride between New York and London on 757 airplanes (normally hold as many 220 passengers) that have been renovated to fly up to 48 passengers in grand style. Each passenger has a mind blowing 21 square feet of personal space and a 78 inch fully flat reclining bed. EOS’ roundtrip price ranges from $3,200 to $7,500. British Airways’ comparable first class service can be as expensive as $14,500.

So why do new airlines have to discount so heavily? Would it really surprise you if I say it’s all about value? Sure incumbent airlines have well-established brand names, a wide network of destinations, and back-up aircraft to help with delays. But I believe it’s all about the value of the “kickback”…frequent flyer programs. Quite simply, new airlines offer inferior programs. Their small network of destinations makes it difficult to earn frequent flyer miles, redeem miles to fun destinations, and diminishes the value of earning “elite” status. The latter reason is a key drawback to attracting well-heeled business travelers. Flyers are awarded “elite” status if they fly at least 25,000 miles a year on an airline. One nice perk of being “elite” is regular first class upgrades. Trust me, there’s a great deal of value in being upgraded from a $300 transcontinental coach ticket into a $2,500 first class seat. If you are a business traveler that flies weekly on full fare tickets (the bread and butter of airline profits), which airline are you going to concentrate your travel on: a startup that flies to a handful of destinations (that may not even offer first class seating) or United Airlines (that flies globally and liberally pours champagne in first class)?

Airline startups have to face the reality that business travelers love these “kickbacks.” As a result, new airlines are forced to offer discounts to compensate for their lackluster frequent flyer programs.

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